Pete Hodgson

Carbon tax speech

Today the Government announces further implementation details of the carbon tax; a policy first announced in 2002.

Climate change is a direct threat to the New Zealand environment, way of life and economy. This government takes that threat seriously. That is why New Zealand, along with 149 other countries, is acting responsibly and has made a start on limiting the extent and impact of this global problem through ratifying the Kyoto Protocol.

The environment and our benign climate are central to the New Zealand way of life. Farming, forestry and horticulture account for a very large proportion of our economy, as does tourism. All are dependent on our climate. Kiwis love the outdoors and we treasure our natural heritage. Not only do they sustain us, they are part of who we are as a nation. They too are dependent on our climate.

If the world fails to act to limit the extent and impact of climate change, the potential impact on New Zealand will be serious or very serious. We need the international process to work. That is why it is essential that New Zealand plays its part in global efforts to limit emissions of greenhouse gases.

To recap, we said in 2002 that the carbon tax would apply across the economy, but not to agricultural methane and nitrous oxide emissions, and that it would approximate the international price of emissions, but be capped at $25 per tonne. We said it would not apply before 2007. We said that the revenue would be recycled back into the economy through other tax changes.

The carbon tax will commence in April 2007, and be set at $15 per tonne of carbon dioxide or equivalent. This rate will apply until 2012 unless the international price diverges substantially from this on a sustained basis. A discussion document, released today, gives further technical details on implementation design.

In the Budget in two weeks, Dr Cullen will detail how the revenue raised by the carbon tax will be recycled. The business tax changes he plans to announce will forego more revenue than the $360 million the carbon tax will generate after negotiated greenhouse agreements are accounted for. This is a shift, not an increase, in overall taxation. The carbon tax is about tackling climate change, not raising revenue for the government.

Whilst the shift will be small, importantly it will be two-fold.

First, the carbon tax will raise energy prices, though not by much. It will add about one cent per unit of electricity, about four cents per litre of petrol, 46 cents to a 9kg bottle of LPG and 68 cents to a 20kg bag of coal. The impact on an average New Zealand household will total about $4 per week for electricity, petrol, and other fuels.

The effect on most businesses will be similarly modest, because, for most, energy is not a major input cost.

Second, the revenue will be recycled by other changes in the tax system, to be announced by Dr Cullen in two weeks. These will encourage investment in new technology, itself a major driver for energy efficiency, and also a major driver for economic transformation in general.

However, the effect of the tax on some energy intensive businesses, even at $15 per tonne, could be detrimental. The government is concerned about this, and has designed policies to help prevent a loss of their competitiveness.

Three years ago, the Negotiated Greenhouse Agreement (NGA) policy was announced. Two weeks ago, we made further simplifications. Firms with NGAs receive carbon tax exemptions in return for moving to world's best practice in emissions management. We anticipate that this approach will give more substantial emissions reductions than a carbon tax alone, and that it will help maintain the international competitiveness of NGA firms. It is a classic win-win.

But some energy intensive companies may be too small to take advantage of the NGA process. That's why three weeks ago we announced a pilot package consisting of grants and demonstration projects to encourage energy intensive small and medium sized enterprises to adopt energy efficient technologies and practices.

Experience gained through the pilot will enable us to better understand the size of both the problem and the solution so that we can take appropriate steps in the 2006/07 year if necessary. The pilot will commence on 1 July this year with an annual budget of $1.48 million.

In conclusion it is worth recalling the two main reasons for a carbon tax.

The first is that if we are going to tackle climate change, we need to start taking the environment into account in the economic choices we all make. This is what the carbon tax does. It begins to affect prices, so that environmentally friendlier technologies become relatively cheaper, and vice-versa. It lines up our environmental interests with our economic ones. Of course at $4 per week per household, this will only lead to pretty modest shifts in consumer choices initially. At the margins however, investment will begin to change, and Dr Cullen’s Budget tax package in two weeks will augment that change.

The second is that the world is moving to a future where limits will increasingly be put on greenhouse gas emissions, and rights to emit will be traded. Emissions now have a price. We’ve designed the carbon tax such that we can move to full emissions trading once international markets begin to mature. We have also designed it for simplicity, so that the perfect does not become the enemy of the good.

As emissions limits become more challenging after 2012 and energy costs rise, those countries that have begun the process of change by integrating a price for emissions into their economies will be in a position to adjust smoothly, and will see an increasing competitive advantage. Others will be left behind.

This initiative is not just about caring for the environment. It also represents prudent economic management – anticipating change and making provision now to position the New Zealand economy to best advantage.

Tackling climate change is a major global challenge. The world has an obligation to future generations that must be faced. The New Zealand government is proud to be part of the gathering global effort that is taking the first step.